When Cash Flow Dips
In 1997, Francine Glick started a company, Hands2Go, that sells hand-sanitizing products. Glick says that, from day one, she was on top of the financials of her successful business. But has her company always had more cash on hand or coming in than it needed to operate? As with the vast majority of businesses, she’d be the first to say hers did not. For those times when she might need cash in a downturn, or when receivables were running late, Glick set up credit lines before she needed to draw on such resources. “As long as you only use it for emergencies and don’t become dependent on it, a line of credit is a useful tool,” she says.
The key, of course, is to use a line of credit (a company credit card is, in essence, the same thing) only when a manager can, with certainty, pinpoint when the business will receive income that can be used to pay down that credit line. Otherwise, one is borrowing blindly or on faith; either way, that’s not good business. One more point: Many a small business has borrowed liberally when facing a cash flow dip, received income in due course, and then failed to pay down its debt. Cash that comes from a line of credit should be considered as receivables that have already been spent. Keeping credit line balances close to zero will mean that a business has full access to dollars it may critically need during even tougher times to come.
Omni Graphics Printing & Copying
Jim Hahn runs Omni Graphics Printing & Copying in Kentucky, a small firm that handles all kinds of printing jobs—from business cards to publishing booklets such as annual reports for sports teams. In business since the mid-1980s, Hahn’s operation increased its year-on-year revenues by 3–5% without the need to market extensively. His five-man business serves both walk-in customers and large business-to-business clientele. Word of mouth sustained his business growth; and, as his business grew, he added printing equipment and employees to boost his productivity and profits.
Yet, by the end of 2008, Hahn could sense that something was wrong. As the American economy started to tank, Hahn could feel that his revenue was sliding and that his bills and payroll were starting to exceed income. But he didn’t know exactly what was happening. That’s because Hahn did not really use a budget or cash flow tracking. “For years, I didn’t need to worry about such things,” he says. “Revenues always handily exceeded expenses.”
The economic downturn has actually helped to make Hahn an even better businessman. “Now, I have a budget that pins down all my expenses; I’ve even listed how much my advertisement in the local phone book costs me. More than that, I have identified where 80% of my income has been coming from, so I know who my best customers have been, their industries, and thus, the probable source for potential future income.”
Hahn’s cash flow management is now a daily activity. First, Hahn has quadrupled the amount of time he is spending on marketing; he now personally checks on his top customers and is attending group business luncheons and making dozens of cold calls to attract customers with a profile that matches those of his best customers in the past. Second, on payables, Hahn has been reducing expenses by tracking every dollar that flows out of his business. He has found that employees have been flexible in temporarily reducing work hours and salaries, that he doesn’t need to stock as much paper and other supplies, that his expensive advertisement in the local phone book doesn’t have the return on investment that he thought, that every large equipment purchase planned for the next year can be deferred, and that numerous other expenses—once deemed essential, such as four telephone lines—can be cut back. Third, Hahn is documenting his case to establish a business line of credit at his bank, so as to be ready to handle downturns in the future.
Hahn admits that this new attention to cash flow management has not been easy. Nevertheless, although these practices were implemented during harsh business times and have boosted his chances of sustaining his business for another 20 years, the exercise in cash flow management has taught him an enormous lesson: “If I can find ways to eke out a profit using these techniques in tough times, imagine how much more profitable my business can be if I manage exactly the same way when the good times return.”